GEITHNER'S FULL OF CRAP: The Bank Bailout Wasn't "Profitable" -- It Will Cost Taxpayers $120 Billion

As big banks have repaid TARP loans in the past few years, it's
become commonplace for government officials and certain pundits
to tout the "profits" taxpayers made on the hugely controversial
program.

Even back in 2009, just a year after the program was launched,
the Treasury Department started spinning stories about the
profits accruing to taxpayers as banks began repaying their TARP
loans.

Secretary Tim
Geithner has played an active role in this effort, including
last March when he declared: "While our overriding objective with
TARP was to break the back of the financial crisis and save
American jobs, the fact that our investment in banks has also
delivered a significant profit for taxpayers is a welcome
development." (Italics added)

The problem is this whole mantra about TARP "profits" is dead
wrong, according to Christy Romero, the newly installed special
inspector general for TARP.

Similar to her predecessor Neil Barofsky, Romero seems to be
saying (indirectly, of course!) the Treasury Department -- and
Geithner -- have been misleading the American public about the
costs of TARP. While that's impossible to prove, there has been a
concerted effort by Treasury to paint the program in the best
possible light. (Reason.com has compiled
a timeline of such statements, for those who want to check
the record.)

My feeling all along is that Treasury has been cherry-picking the
TARP data, focusing on the repayments vs. the loans still
outstanding, much less the "soft" cost of the bailouts. It's like
an investor who only talks about the stocks that have produced
profits, ignoring the ones with losses.

Politico.com's
Ben
White reports on a Treasury response to Romero's report that
seeks to dismiss the findings without actually addressing them.

"We've addressed each of these specific claims in old [special
inspector general for TARP] reports. That said, it's important
to step back and remember the size of the financial shock that
hit in 2008 and just how close we came to a second Great
Depression," a Treasury official tells White. "We still have a
lot more work ahead to fully repair the terrible damage caused
by the crisis ... but the government's emergency response was
essential to preventing a meltdown of the entire global
economy. And now we're winding down those programs faster and
at a much lower cost than virtually anyone had anticipated
during the dark days of the crisis."

There is a case to be made that TARP -- however flawed and badly
managed by then-Treasury Secretary Hank
Paulson -- was a necessary evil that helped prevent the
financial system from totally collapsing, as Henry and I discuss
in the accompanying video.

But there's a big difference between "a much lower cost" and the
"significant profit" Geithner has touted, and government
officials are compounding the "original sin" of TARP by
pretending otherwise.

TARP 'Costs and Legacies'

The
Congressional Budget Office estimates TARP will ultimately
cost $34 billion, based on future expected payments. But Romero
notes banks and financial institutions still owe $118.5 billion
in TARP funds. Her estimate includes the government's ongoing
stakes in companies like Ally
Financial, AIG and
General Motors, as well as $4.2 billion Treasury had written off
and realized losses of $9.8 billion "that taxpayers will never
get back."

The bigger issues is that "TARP's costs and legacies involve far
more than just dollars and cents," Romero writes. "An analysis
should not be focused alone on money in and money out."

Indeed,
these "legacies" include the moral hazard engendered by the $700
billion bailout, which solidified the idea that some banks are
"too big to fail."

"A recent working paper from Federal Reserve economists confirms
that TARP encouraged high-risk behavior by insulating the risk
takers from the consequences of failure -- which is known as
moral hazard," Romero writes.

Moral hazard may be hard to prove -- it's like Supreme Court
Justice Stewart's famous saying about pornography. But what's
undeniable is the big banks got bigger in the aftermath of TARP:
The five-largest U.S. banks now control 52% of the industry's
assets, up from 26% in the early 1990s, according to the Dallas
Fed.

Meanwhile, around 350 small banks face a "significant challenge"
in repaying about $15 billion in outstanding TARP loans, in part
because they lack access to the capital markets, according to
Romero. "The status of those banks is one of the major issues
facing TARP nearly four years after the financial crisis."

If and when those banks default on their loans, there will be a
cost to taxpayers, be it in the form of a hit to the FDIC
insurance fund or further concentration of bank assets as
regulators force failing firms to merge with larger ones.

Concentration of bank assets is but one of the "profound
long-term consequences" of TARP cited by Romero. Others include
"the impact on consumers and homeowners from the large banks'
failure to lend TARP funds," which in turn spurned a huge
backlash against corporations generally and got millions of
ordinary Americans riled up about the cozy relationship between
Wall Street and Washington D.C. (There's also the cost of the
Fed's zero interest rate policy and the government's unlimited
pledge to support Fannie
Mae and Freddie
Mac, among other bailouts.)

Arguably, TARP helped animate both the Tea Party and Occupy Wall
Street movements and generally reaffirmed Americans' loss of
faith in our institutions and elected officials. These
developments have long-term societal implications that go far
beyond any quantitative analysis of the "cost" of the bailouts.